The Effects of Derivatives on Firm Risk and Value

52 Pages Posted: 11 Feb 2010 Last revised: 10 Mar 2014

Söhnke M. Bartram

Warwick Business School - Department of Finance

Gregory W. Brown

University of North Carolina (UNC) at Chapel Hill - Finance Area

Jennifer S. Conrad

University of North Carolina Kenan-Flagler Business School

Multiple version iconThere are 3 versions of this paper

Date Written: February 10, 2010

Abstract

Using a large sample of non-financial firms from 47 countries, we examine the effect of derivative use on firm risk and value. We control for endogeneity by matching users and nonusers on the basis of their propensity to use derivatives. We also use a new technique to estimate the effect of omitted variable bias on our inferences. We find strong evidence that the use of financial derivatives reduces both total risk and systematic risk. The effect of derivative use on firm value is positive but more sensitive to endogeneity and omitted variable concerns. However, using derivatives is associated with significantly higher value, abnormal returns, and larger profits during the economic downturn in 2001-2002, suggesting firms are hedging downside risk.

Keywords: Derivatives, risk management, hedging, international finance

JEL Classification: G3, F4, F3

Suggested Citation

Bartram, Söhnke M. and Brown, Gregory W. and Conrad, Jennifer S., The Effects of Derivatives on Firm Risk and Value (February 10, 2010). Journal of Financial and Quantitative Analysis, Vol. 46, No.4, August 2011, pp. 967-999.. Available at SSRN: https://ssrn.com/abstract=1550942

Söhnke M. Bartram (Contact Author)

Warwick Business School - Department of Finance ( email )

Coventry, CV4 7AL
United Kingdom
+44 (24) 7657 4168 (Phone)
+1 425 952 1070 (Fax)

HOME PAGE: http://go.warwick.ac.uk/sbartram/

Gregory W. Brown

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Jennifer S. Conrad

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

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